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Second-best tax policy in a growing economy with externalities

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Author Info
Steve Cassou () (Kansas State University)
Arantza Gorostiaga () (Universidad del País Vasco / The University of the Basque Country)
María José Gutiérrez () (Universidad del País Vasco / The University of the Basque Country)
Stephen Hamilton () (CAL POLY STATE UNIVERSITY, SAN LUIS OBISPO)

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Abstract

This paper investigates the exploitation of environmental resources in a growing economy within a second-best …scal policy framework. Agents derive utility from two types of consumption goods –one which relies on an environmental input and one which does not –as well as from leisure and from environmental amenity values. Property rights for the environmental resource are potentially incomplete. We connect second best policy to essential components of utility by considering the elasticity of substitution among each of the four utility arguments. The results illustrate potentially important relationships between environmental amentity values and leisure. When amenity values are complementary with leisure, for instance when environmental amenities are used for recreation, taxes on extractive goods generally increase over time. On the other hand, optimal taxes on extractive goods generally decrease over time when leisure and environmental amenity values are substitutes. Unders some parameterizations, complex dynamics leading to nonmonotonic time paths for the state variables can emerge.

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Paper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 200603.

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Date of creation: 16 Oct 2006
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Handle: RePEc:ehu:dfaeii:200603

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Postal: Dpto. de Fundamentos del Análisis Económico II, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Related research
Keywords: Growth and the environment; Elasticity of substitution; Second-best policy;

Find related papers by JEL classification:
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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    Other versions:
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    Other versions:
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